Shavteli Winery: where to go from here?

Shavteli Winery: where to go from here?

Armand Gilinsky and Brent Trela

Georgia is the cradle of wine and Georgian wines have tremendous potential. It is a pity that even

though we have a Wine Producers’ Union, it is NOT working properly or at all. How can Georgian

wines compete against, say, Chilean wines, if the Chilean government is subsidizing its wineries?

The Chilean Ambassador carries Chilean wine wherever he goes. Our government must play a

role even if we have a free market economy; it has to direct wineries and assist them (Comment

from Director, Georgia’s Wine History Foundation, July 15, 2008[1]).

As Mr Georgi Ambasador, a 17-year veteran production engineer at Shavteli Winery (Plate 1),

toured his winery factory in mid-July 2008, a toxic odor of paint emanated from the

fermentation building. He saw the wires dangling outside the electric boxes that powered the

winery, and began to wonder whether or not now was the time to make some changes in his

life. ‘‘It’s challenging to make good wines in facilities like this,’’ he thought.

Shavteli Winery (Shavteli) was a medium-sized Georgian winery located in the historic

Racha-Lechkhumi wine growing region, a region that produced mostly semi-sweet wines

made from Kvanchkara (red) and Moujoureturi (black) grapes. Shavteli had been in operation

for 65 years, having been founded as a private winemaking facility for Josef Stalin, Soviet

leader from 1941 to 1953. Shavteli also made a modest amount of wine from Rachuli Tetra

(white) grapes. Shavteli processed 500 tons of grapes and produced 200,000 bottles of wine

per year. Shavteli’s factory consisted of 12 upright oak fermentation vats (over 40-years-old;

Plate 2), and a screw press.

Wine was pumped from the fermentation vats downhill to a separate building housing

refrigeration equipment. Electricity costs were 1,500 Georgian Lari (GEL) per month in 2008,

equivalent to about US $750 (1 Lari ¼ $0.566 as of July 2008).

As a result of the Russian embargo of Georgian wine that began in 2006, Georgian grape

prices had dropped from their peak of about $3 in 2001 to $1 per ton in 2008. In this period,

Shavteli’s wine inventory grew to 60,000 litres, consisting of 10,000 litres of 2005 vintage

wines, 15,000 litres of the 2006 vintage, and 35,000 litres of the 2007 vintage. Wines destined

for export were tested three times a year by GTZ, Organization of German Federal Ministry for

Economic Cooperation.

Shavteli’s wine appeared to Mr Ambasador to be in good condition, though oxidation of older

lots would soon render those unfit for sale, except perhaps if the fermented wine were

re-processed into chacha (brandy), known in Georgia as ‘‘wine vodka.’’ Laboratory analysis

of wine was conducted gratis in a lab owned by a nearby winery, about 10 km west of

Shavteli’s factory. All bottling was done by hand and customized to order (primarily for

customers in Tbilisi, the capital of Georgia, and the republics near the Black Sea). Shavteli

purchased bottles from a factory near the Ksani River in South Ossetia, a region south of the

Caucasus Mountains that was notably the source of continuing territorial conflicts between

Georgia and Russia both prior to and during a brief war in early August 2008. Georgian-made

DOI 10.1108/20450621111186200 VOL. 1 NO. 4 2011, pp. 1-27, Q Emerald Group Publishing Limited, ISSN 2045-0621 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 1

Armand Gilinsky is a

Professor of Business at

Sonoma State University,

Rohnert Park, California,

USA. Brent Trela is an

Assistant Professor of

Enology at Texas Tech

University, Lubbock, Texas,

USA.

The authors prepared thisfield-researched case,synopsis, and instructor’smanual solely for classdiscussion rather than toillustrate either effective orineffective handling of asituation. All names of peopleand companies have beendisguised at their request,although all events are real.

Disclaimer. This case is writtensolely for educational purposesand is not intended to representsuccessful or unsuccessfulmanagerial decision making.The author/s may havedisguised names; financial andother recognizable informationto protect confidentiality.

bottles cost approximately one half the price of more prevalent Italian-made wine bottles

used by the wine industry in Europe.

Similar to other wineries in the Racha region, Shavteli had neither a tasting room nor facilities

to offer direct sales of its wines to customers. The winery was not signposted from the road

(Plate 3). Four of Shavteli’s primary competitors in the Racha-Lechkhumi region had shut their

doors since the embargo took hold in 2006. Two other competitors remained open but had

limited sales. Mr Ambasador claimed that his competitors had roughly the same levels of

production capacity and inventories under refrigeration. He said: ‘‘As a result of the cessation

of trade with Russia, our marketing plan calls for us to sell primarily to Ukraine and Germany.

We are currently working with Germany to expand our sales network there.’’

Plate 1 Shavteli Winery, July 11, 2008

Source: Courtesy of authors

Plate 2 Fermentation vats in Racha, July 11, 2008


PAGE 2 jEMERALD EMERGING MARKETS CASE STUDIESj VOL. 1 NO. 4 2011

Georgia wine industry overview

The Georgia wine story was one of the wine world’s best-kept secrets. Georgia had a unique

natural heritage in indigenous varieties, unmatched in the rest of the world. Still, the Georgian

wine sector was small by world standards, and its varieties were relatively unknown in the

outside world. The winemaking potential of a handful of these varieties such as Saperavi (red)

and Rkatsetli (white), was considered by some industry observers to be world class, while

that of the rest remained largely unknown. Local producers considered the most

commercially important varieties to be: red wines – Saperavi, Ojaleshi, Aleksandruli,

Tavkveri, Mujuretuli, Dzelshavi, and Shavkapito; white wines – Rkatsiteli, Mtsvane Kakhuri,

Khikvi, Kisi, Tsolikauri, and Goruli Mtsvane. The majority of Georgia’s vineyards were located

in the Kakheti region (32,823 hectares, 68 percent of total national wine growing acreage),

although other significant grape-producing regions included Imereti (8,584 ha), Kartli

(2,414 ha) and Racha (1,348 ha).

As of 2008, there were approximately 100 wineries in Georgia. Of those still in operation, 15

were classed as large wineries (processing more than 3,000 tons of grapes per annum) and

about 40 as medium-sized wineries (1,000-3,000 tons). The remaining small wineries

produced around 25-1,000 tons per annum. From 1975 until the end of the 1980s, the market

for Georgian wine was essentially static, with exports of around 200 million bottles per year to

the Soviet Union. Much of this was Port style wine and dry wine, and some red medium-sweet

wine was also sold during this period. After Georgia declared independence from the former

Soviet Union on April 9, 1991, and until the Russian embargo in 2006, wine exports grew from

just under 20 million liters to over 40 million liters in 2005, the vast majority going to Russia and

former Soviet republics.

As a result of the 2006 Russian wine embargo, the largest Georgian wineries began to

diversify their marketing efforts away from the former Soviet markets. Some of the most

promising markets had small populations of Georgian expatriates, such as Ukraine,

Germany, Poland, and the Baltic States. Pre- and post-embargo Georgian wine exports by

country from 2005 to 2007 are shown in Exhibit 1 and brandy export statistics are shown in

Exhibit 2. Recent growth markets for Georgian wine exports included the former Soviet

countries and China. Average 2007 per bottle price points diverged greatly among the former

Plate 3 Racha, July 12, 2008


VOL. 1 NO. 4 2011 jEMERALD EMERGING MARKETS CASE STUDIESj PAGE 3

Soviet countries, from 3.24 Lari in Azerbaijan to 4.73 Lari in Kazakhstan. After 2006, Ukraine

emerged as the most important export market for Georgian wines. Opening up new markets,

especially for a product as difficult to transport and sell as wine, took time and resources. The

vast majority of growers, rural peasants, appeared to be the biggest victim of the embargo as

their grapes were considered as surplus supply in relation to the precipitous drop in demand.

Independent growers’ grapes were not considered to have attained the same quality as those

from ‘‘estate-grown’’ grapes, i.e. from the vineyards attached to producing wineries.

The Georgian wine market was dramatically damaged by the Russian wine embargo. Prior to

the ban, wine was Georgia’s largest export in terms of value; after, its largest export was scrap

metal. Following the Georgian wine ban in March 2006, exports dropped to around 15

percent its pre-ban level in volume terms. The immediate government response to the

embargo was to aggressively promote Georgian wines abroad. High-end niche marketing,

however, seemed unlikely to some observers to create the dramatic volume increases in

sales that would be necessary to help the smaller Georgian wine producers. Before the

Russian wine embargo, the average litre of Georgian wine was exported at $1.95 per litre

($1.46 per bottle). In 2006 after the wine ban, the average litre was exported at $3.61 per litre

($2.70 per bottle). The average price per litre for export ranged between $3.10 and 3.40 per

litre in 2007-2008. This was the equivalent of $2.30 to $2.50 per bottle, translating into a retail

price in Europe or the USA of $10 per bottle or more and positioning Georgian wine as a

relatively highly priced developing world wine. An industry observer predicted that, ‘‘any

recovery taking place in the Georgian wine business would be driven by the largest

producers able to produce wine to be marketed to the West for high prices, yet there would be

little or no recovery for the majority of small wine producers[2].’’

In 2007, Georgia’s real gross domestic product (GDP) grew at a rate of 12 percent, placing

Georgia as one of the fastest-growing emerging economies in Eastern Europe. Still,

according to the 2008 World Bank Poverty report, unemployment in Georgia persisted, at

about 16.5 percent of the workforce. Racha-Lechkhumi was the poorest region in Georgia

with a poverty head-count of over 50 percent, while the wine-growing region of Kakheti was

the second poorest, with a poverty head-count of approximately 46 percent. Support for the

wine industry represented 25 percent of the budget of the Ministry of Agriculture in 2008, or

GEL 28.5 million (US$17.2 million), although as a proportion of the Georgian Government’s

overall annual spending, support for the wine industry remained small (,0.5 percent). For the

nation’s population to absorb the spare capacity, it was estimated that every adult in Georgia,

a country with a population of about 4.7 million people, would have to drink around 15 extra

bottles of wine per year.

One industry observer, who was local manager of the American Chamber of Commerce in

Georgia, commented in mid-July 2008:

A lot of wineries in Georgia are in the same difficult position as Shavteli, and have no markets where

to sell wines. A strategic decision was made by most producers to sell wines at a higher end price

rather than at the low end, based on a recommendation that was given by international experts

consulting with the national industry in 2006. But time was against our wineries as stored wine was

beginning to oxidize and become worthless. Since there is an opportunity to reinvent the industry,

Georgian wineries should completely convert to organic or environmentally friendly.

The most important institution in the Georgian vine and wine sector was Samtrest, the Ministry

of Agriculture’s Department of Vine and Wine, a holdover from the state-controlled Soviet era.

Samtrest compiled statistics on Georgian grape production, which are shown in Exhibit 3.

Samtrest regulated all activities in the vine and wine sector including viticulture, grape

processing, production and sale, label control, wine certification, export certification, and

relations with international bodies. The chairman of the Georgian Chamber of Commerce and

Director of Georgia’s Wine History Foundation, offered an observation in mid-July 2008 about

the country’s wine industry:

The strong Georgian currency has been very harmful for wine exports, and export, in general. This

is causing more harm than the Russian wine embargo. Also, the Samtrest certification procedures

are difficult and time consuming, hurting exporters. That agency’s methodology for tasting wines

and approving them for export has also been very inefficient. There are about 100 wineries in


Georgia and about 10 of them are in good standing right now. The Russian embargo proved to be

positive for big and good wineries as they started exploring new alternative markets. Some

European wine agencies are organizing seminars on how to market wine, labelling issues, and

how to export to Europe. Still the small producers have done nothing to change their situation, they

are just waiting it out, expecting for the Russian embargo to be lifted.

A former high-ranking official in the Georgia Business Council was not so sure that taking a

‘‘wait-and-see’’ attitude or expecting future government assistance for the wine sector were

the most helpful strategies for Georgian wine producers:

Producers are looking up to the Government for some changes and help, but in fact they have to

help themselves with the direction of their businesses. There is no brand recognition of Georgian

wine. Both large and small wineries do not know how to professionally market their wines – many

times they participate passively in the wine exhibitions in Europe, but are not actively marketing

and promoting their wines. It is important for the companies to market together. For example, one

winery is exporting to Benelux countries and cannot even fill up the container so is sending a

half-filled container of wines at a higher cost, rather than sharing the cost with another winery to fill

up the container. Also, there are many wines produced in the EU Member states that have

‘‘borrowed’’ Georgian names (for example, Kvanchkara in Germany), which means that someone

is looking for Georgian wines in those countries where ‘‘fake wine’’ is produced.

According to statistics compiled by the International Organization of Vine and Wine in 2006, in

the global wine market, Georgia captured only some 0.3 percent of the total with its annual

production of one million hectoliters. In comparison, France dominated the world wine market

with a share of 18.2 percent, owing to its annual production of 52 million hectoliters. Other

major wine producers on the world stage included Italy with 50.5 million hectoliters, Spain

with 34.8 million hectolitres, and the USA with 28.7 million hectoliters.

The Racha wine-growing region

The Racha region was well known for its verdant naturalistic beauty, crystalline rivers and

reservoirs, hiking trails, home grown and prepared foods, and welcoming people. Access to

Ambrolauri, the capital of the Racha wine growing region (see map in Exhibit 4) was difficult

even for the hardy and determined tourist, as the ride to the region from Tbilisi took nearly six

hours. Roads from Tbilisi were congested and were being widened from Tbilisi to Gori. Gori,

Georgia’s seventh largest city (population 50,000) was historically significant as the

birthplace of Josef Stalin.

Few rest stops en route were available for wine tourists and apparently very limited options for

accommodations were available between Tbilisi and Ambrolauri, and no options for tourists in

the Racha region save for guest houses in Ambrolauri. Air quality was low due to temperature

inversion layers in valleys, fog in the foothills to the Caucasus, and car exhaust. Driving there

from the nation’s capital, Tbilisi was hazardous and cattle would often temporarily block the

route. Abandoned factories and crumbling residential buildings abounded. Rest stops were

difficult to find. The winding mountain road between Kutaisi (221 km west of Tbilisi) and

Ambrolauri (about 50 km northeast of Kutaisi) was only partially paved and hazardous for all but

the most attentive drivers, as there were few guardrails and a constant threat of avalanches.

Routes were not well signposted. Apart from pictograph signs indicating monuments, hiking

trails, and places of historical interest, neither a tourist information office nor a central wine

tasting retailing facility for the region was in evidence. Facilities were unfriendly for disabled or

elderly tourists. Goats, chickens, and cows roamed freely on the unpaved streets.

The only way visitors would know that they were in a major wine-producing region was a large

sign depicting a wine bottle located in the roundabout of the entrance to Ambrolauri. Few

signs if any were in other languages besides Georgian (except for pictograph signs for

caves, nature trails, and vistas). Racha was noted primarily for semi-sweet wines made from

blending Kvanchkara (red) and Moujoureturi (black) grapes, and for historically producers of

choice for Josef Stalin. Each winery in the region possessed a similar-sized production

capacity, and with the possible exception of Chrebalo Winery, an estimated inventory of close

to 60,000 litres of wine, dating back to 2005.


Semi-sweet wines predominated, and could be stored in bulk inventory (tanks; Plate 4) for

three to four years if kept refrigerated at 0-28C. Bottled wine inventory, if refrigerated, was

considered sellable for at most two years, after which tannin-anthocyanin precipitation left

sediment in the bottom of the bottle similar to aged Port-style wines. Dry wines had a

maximum three-year life in tanks and needed to be bottled thereafter. From the harvest in

2005, the bulk and bottled wine inventory in Racha might have a very limited remaining life

span according to local Georgian vintners, however, wines from that 2005 harvest appeared

still fruity and seemed capable of aging for a few years more. Europeans in general were

familiar with aged wines that lost fruitiness, for the sake of softer tannins vs younger, fruitier,

and more astringent New World style wines and consumption patterns.

Key local competitors

Of the major Racha wineries, only two besides Shavteli – Bugeuli and Chrebalo – remained

open as of mid-July 2008. Exhibit 5 shows wineries in Racha-Lechkeumi.

Bugeuli Winery (also known as Alexandreuli) farmed about 30 hectares on either side of the

Lukhuni River. Bugeuli was privately owned by investors and staffed by 25 full-time

employees. The majority of its production came from blending Alexandreuli/Moujoureturi

(black) grapes, grown from original vines in the region. A modest amount of wine was made

from Rajouri Tetra (white) grapes. The land had been purchased in 1988-1989, and with

funding from World Bank Credit, a factory was built in 2005.

Upstairs from its cooling facility, Bugeuli had a partially completed modern guest quarters for

five persons and a tasting room. A state-of-the art laboratory was located adjacent to these

facilities. The new building in all its modernity presented a stark contrast to the adjacent cellar.

Its winemaking equipment had been purchased from defunct local winemakers, but was

antiquated: locomotive-sized pumps, 19 Soviet-era enamel-lined mild steel fermentation

tanks (12 for red wines, seven for white; Plate 5) and two traditional oak upright open-top

tanks. Bugeuli also owned a state-of-the-art grape destemmer-crusher (Plate 6), a must

pump, and filters purchased from the Italian manufacturer Della Toffola.

The Bugeuli winery was fully integrated. Fermented wine was refrigerated in a separate room

consisting of 40 tanks. Bottle inventory also needed to remain chilled. Bugeuli used a modern

Plate 4 Traditional Georgian wine storage containers, Kvevrebi, July 20, 2008



membrane filtered bottling line from Italy, claimed to be the only one in Racha and available

for use to other wineries, used Pall membrane filters, and had a well equipped laboratory

capable of measuring standard parameters such as alcohol (distillation), pH, titratable

acidity, sulphur dioxide and iron levels, among others. Bugeuli also offered laboratory

analysis to other wineries. Monthly electricity costs (primarily for chilling the wines) were

Plate 5 Soviet-era steel fermentation tanks in Racha, July 11, 2008


Plate 6 Destemmer in Racha, July 11, 2008



estimated at 2,000 Lari (about US$1,176). Bugeuli’s modern automated Bolero (Italy) bottling

and labelling line could attain up to 1,500 bottles per hour throughput and was the sole

automated bottling line in Racha.

Bugeuli also bottled and labeled wine for other wine makers in Racha (such as Shavteli and

Chrebalo, profiled below) and also for wine makers in Kakheti, the predominant Georgian

wine-growing and wine-making region, located about eight-nine hours’ drive to the

southeast. Bugeuli’s winemaker, Mr S. had once been a professor of microelectronics before

taking up wine making as a hobby when the universities in Tbilisi closed. Mr S. was actively

exploring a partnership with an Iowa (USA) distributor. Bugeuli’s marketing plan was updated

annually, he said:

The loss of our Russian contract was a major concern, as Russia purchased 98 percent of our

production before 2006. Our marketing plan calls for us to completely replace lost Russian demand

with Ukrainian demand within one year. Our sales were slightly up last year. All temperature controls

are manual using thermometers. A membrane filterpress would reduce our monthly electricity bill

and allow us to reduce reliance on refrigeration to store semi-sweet wines without fermenting to

dryness. We have no money to purchase a membrane filterpress. We have no real competition in

Racha. We are members of the Georgian Young Winemakers trade association but this does not

help us much. We are building guest quarters to encourage wine tourism.

80-85 percent of Bugeuli’s annual production consisted of semi-sweet wines; approximately

15 percent were dry wines targeted to European markets. Bugeuli’s wines retailed for 18-19

Lari per bottle in Georgia (and retailed for about US$11) and were sold from the factory to

wholesalers at 7 Lari per bottle. Bugeuli offered no direct sales of wines to customers nor was

a retail shop planned.

Chrebalo Winery was privatized in 1995 and became known as Rachuli Wine Ltd Chrebalo

owned vineyards that had produced wine since the 1870s, and was located in a factory built

during Second World War (1942-1943). The winery used traditional South Caucasus

production method that were said to date back to circa 6000 BC. These methods involved the

use of Qvevri, Georgian clay vessels lined with beeswax filled with grape juice, which were

then buried underground for the fermentation and aging of wines. The privately owned

company had 14 full-time employees, including a winemaker, Mr G who owned five percent of

the company’s stock. Mr G. had graduated with a degree in viticulture and enology from the

Agriculture University in Tbilisi in 1992.

Chrebalo owned neither a tasting room nor facilities to offer direct sales of its wines to

customers. Its capacity was 500 tons and 200,000 bottles per year. The winery consisted of

large Soviet-style grape destemmer-crushers, 12 upright oak fermentation vats (over

40-years-old), and a screw press. Wine was pumped from fermentation vats downhill to a

separate building that housed enamel-lined mild steel horizontal storage tanks and

refrigeration equipment. The facility was not very visitor-friendly: similar to Shavteli, strong

chemical fumes, possibly from paint, made breathing unpleasant in the refrigerated tank

storage facility, and electric boxes were left open with dangling wires. Given the facilities and

equipment conditions, sanitation looked exceedingly challenging at best. Electricity costs

were estimated at 1,500 Lari (about US$880) per month (primarily for chilling the wines).

Chrebalo occasionally conducted an analysis at the neighbouring Bugeuli winery. According

to Mr G, insufficient financing was available to purchase more modern equipment.

Chrebalo’s winemaker, Mr G, was a member of Georgia’s Young Winemakers’ Association

and consulted on winemaking for the neighboring Bugeuli winery. According to Mr G:

Chrebalo has a small amount of 2005 semi-sweet wine left in inventory, consisting in total of about

60,000 litres. We sell about 80,000 bottles of wine per year. Our prices are about 30 Lari wholesale,

and retail for about e5.20 in Germany and for about $5.80 in the USA. I estimate that all other

wineries in Racha whether they remain open or closed currently have roughly the same levels of

production capacity and inventories under refrigeration as we do here at Chrebalo. Our sales are

very small. We used to sell 60 percent of our annual bottling to Russia and the remainder to the

USA. Now our entire sales are to the USA, Canada, Germany, and China. We sell about 10,000

bottles to the Chinese market, primarily in Shanghai.


The need for a strategy

Back at Shavteli, Mr Ambasador felt that major changes were needed at both his and the

other two remaining open wineries in Racha. Like his counterparts at Bugeuli and Chrebalo,

Mr Ambasador was a member of Georgia’s Young Winemakers’ Association and consulted

on winemaking for other nearby wineries. He had accumulated a seven percent stake in

Shavteli as part of a seven-person private ownership group. The investor group relied

primarily on financing from Georgia’s People’s Bank, but lenders had been uneasy about

making commitments to wineries since the Russian embargo. Mr Ambassador lamented:

We need financial help to upgrade production and to modernize and maintain our factory. We also

have plans but no money to develop wine tourism. In the next five years we forecast in our

marketing plan that dry wine production and sales will rise from current 10 percent to about

40 percent, replacing our semi-sweet production. But doing this will necessitate changes in the

production scheme for our entire wine-growing region.

Mr Ambassador was proud to be a part of Georgia’s claim to be among the earliest nations in

the world to grow grapes and make wine. Wine making in the South Caucasus country dated

back 5,000 years, according to some archaeological findings. But the current Georgian wine

inventory was vast (Exhibit 6) and stockpiles needed to be sold or made into chacha brandy

or disposed of somehow in order to make room for future harvests and future production.

To promote exports of this growing inventory of wines, Mr Ambasador wondered, should

Shavteli seek government assistance? Should it try and sell its rapidly oxidizing inventory

(Plate 7) on the bulk wine market or convert some or all of the wine into brandy? Should it form

alliances with other Georgian producers? Should it press its fellow regional and national

producers to join the World Wine Trade Group (WWTG) – an organization of major wine

exporters that included Argentina, Australia, Canada, Chile, New Zealand, South Africa, and

the USA or, should Shavteli try and go it alone?

Notes

1. All interviews were conducted by the case writers during a visit to Georgia in July 2008.

2. Source: ‘‘The Georgian Wine Business and Problems for Small Producers’’ www.geowel.org/index.

php?article_id¼34&clang¼0, October 30, 2009, accessed May 4, 2011.

Keywords:

Strategy implementation,

Situation analysis,

Country competitiveness,

Wine industry,

Winemaking

Plate 7 Testing wine inventory at Shavteli, July 11, 2008



Exhibit 1. Georgian wine exports by country, 2005-2007

Table

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388,9

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297.5

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162,0

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146.3

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Exhibit 2. Georgian brandy exports by country, 2005-2007

Exhibit 3. Wine produced in Georgia, 2002-2007

Table EII

2005 2006 2007

Country USD $000Liters, 100 percent

spirit USD $000Liters, 100 percent

spirit USD $000Liters, 100 percent

spirit

USA – – 36.5 6,352.8 24.8 2,450.2Czech Republic – – 53.3 2,619.0 3.5 32.8Finland – – – – 2.3 350.0UK – – 3.9 110.4 – –Germany – – 7.0 1,426.8 0.2 25.2Israel – – 0.0 0.4 9.3 1,850.4Canada 0.5 18.0 3.1 108.0 6.3 302.4Latvia – – 37.0 2,071.6 32.7 3,630.4Mongolia – – – – 25.8 1,275.0Russian Federation 60.2 22,654.0 – – – –Taiwan, Province ofChina 162.7 10,496.0 – – – –Tajikistan – – 2.3 12.4 2.6 300.0Ukraine – – 14.4 615.2 140.7 10,527.0Other countries 0.8 67.6 0.1 1.7 1.2 76.8

Source: Vine and Wine Department SAMTREST

Table EIII

Category Measure 2002 2003 2004 2005 2006 2007

Grape wine Thousand daLa 2,021.3 2,307.8 2,666.2 3,906.0 1,872.4 1,281.8Thousand GEL – – 84,930.7 137,244.2 68,059.9 42,655.8

Sparkling wine Thousand daLa 117.7 160.3 163.8 189.2 175.6 197.8Thousand GEL – – 5,598.2 8,580.4 7,418.3 11,456.3

Note: aDecaliter ¼ daL ¼ 10 liters or 101 literSource: Vine and Wine Department SAMTREST


Exhibit 4. Map of regions in Georgia

Exhibit 5. Major competing wineries in Racha-Lechkeumi region of Georgia

Figure E1

Table EIV

Winery(date founded) Location Status

Capacity,tons

of grapes

2007production,

bottles

Annualsales,bottles

Inventory inlitres

(2005-2007)

Bugeuli (2005) Ambrolauri Open 500 50,000 40,000 40,000Chrebalo (1942) Open 500 200,000 80,000 11,500Georgian Wine House Closed indefinitely 500 60,000 est.

Golden KhvanchkaraUndergoing renovations –funding from TBC bank 500 60,000 est.

Khvanchkara Closed indefinitely 500 60,000 est.Orbeli Closed indefinitely 500 60,000 est.Shavteli (1943) Lechkhumi Open 500 Not available Not

available60,000 est.

Tsageri Closed indefinitely 500 60,000 est.

Source: Case writers’ estimates based on conversations with regional wine producers


Exhibit 6. Estimated wine inventory in Georgian wineries, January 1, 2008,in decilitres

Table EV

Company name White wine Red wine Total

Total 19,614,054 36,907,922 56,521,976‘‘Georgian Wine and alcoholic beverages’’ Ltd 1,743,925 3,869,435 5,613,360Telavi Wine Cellar, Ltd 2,549,950 705,640 3,255,590‘‘Alaverdi’’ Ltd 887,600 1,823,334 2,710,934‘‘Tiflis Wine Cellar’’ Ltd 462,074 2,227,341 2,689,415‘‘Winery Khareba’’ Ltd 1,230,637 1,082,724 2,313,361‘‘Askaneli Brothers’’ ltd. 837,063 1,269,238 2,106,301‘‘Georgian Wines’’ Ltd 37,950 2,049,580 2,087,530JSC ‘‘Teliani Valley’’ 775,670 1,306,690 2,082,360‘‘Badagoni’’ Ltd 536,140 1,047,643 1,583,783JSC ‘‘Tbilvino’’ 594,360 916,220 1,510,580Ltd ‘‘Wineman’’ 440,296 933,180 1,373,476JSC ‘‘Wandaris Rvinis qarxana’’ 1,210,410 47,880 1,258,290JSC ‘‘Okami’’ 384,950 816,270 1,201,220Ltd ‘‘Aieti Georgia’’ 633,740 548,860 1,182,600Ltd ‘‘Gurjaani Wine Cellar’’ 67,946 1,102,800 1,170,746Ltd ‘‘Manavi Wine Factory’’ 394,210 758,210 1,152,420JSC’’Kotekhii-Gurjaani Wine Factory’’ 187,977 897,853 1,085,830LtdKakheti Wine House’’ 330,491 672,670 1,003,161Ltd ‘‘Corporation Georgian Wine’’ 474,460 511,519 985,979JSC ‘‘Vaziani’’ 75,433 892,027 967,460Ltd’’Tbilvazi’’ 497,684 403,504 901,188Ltd’’Kindzmarauli’’ 257,643 570,153 827,796Ltd ‘‘Tsinandali Old Cellar’’ 204,250 611,101 815,351Ltd ‘‘Kakhuri’’ 158,470 654,280 812,750Ltd’’Tiflis Cellar’’ 175,725 589,495 765,220JSC ‘‘Corporation Kindzmarauli’’ 53,280 656,370 709,650Ltd ‘‘Georgian Cellar’’ 542,912 165,014 707,926Ltd ‘‘Georgia’’ 103,133 565,806 668,939Ltd ‘‘Manavi Wine Cellar’’ 161,495 504,000 665,495Ltd ‘‘Company Besini’’ 171,780 455,000 626,780Ltd ‘‘Imperia of Georgian Wine’’ 26,300 593,068 619,368Ltd ‘‘Nike 21’’ 130,660 483,410 614,070Ltd ‘‘Georgian Wine House’’ 141,908 430,160 572,068Ltd ‘‘Tempi Pliusi’’ 20,000 544,800 564,800Ltd ‘‘Vaziþ ’’ 201,100 339,327 540,427Ltd ‘‘KaKhuri Wine Cellar’’ 108,600 375,000 483,600Ltd ‘‘Tamada’’ 122,260 349,610 471,870Ltd ‘‘Georgian Wine’’ 0 444,080 444,080Ltd ‘‘Gia-63’’ 122,450 315,070 437,520Ltd ‘‘Kvareli Wine Company’’ 125,737 299,588 425,325Ltd ‘‘KaKhuri Traditional Winery’’ 99,609 319,230 418,839Ltd ‘‘Kakheti-k’’ 182,540 185,380 367,920Ltd ‘‘Tsinandali the best Wines of of XXI Century’’ 71,510 213,650 285,160Indiv. Entrep. ‘‘valentina kalatoziSvili’’ 30,000 220,000 250,000Ltd ‘‘qarTuli Rvinoebis galerea’’ 15,100 227,550 242,650Ltd ‘‘zegaani’’ 107,245 132,306 239,551Ltd’’Rvino Cxaveri’’ 52,210 186,000 238,210Ltd ‘‘Aleqsandrouli’’ 34,310 170,300 204,610Shavnabada St. George Monastery 64,000 115,000 179,000Ltd ‘‘Aguna’’ 60,968 108,668 169,636Ltd ‘‘Trade House Kakhetians’’ 73,909 95,552 169,461Ltd ‘‘Wikaani Wine Cellar’’ 67,000 95,786 162,786Ltd ‘‘Saqalkolmrewvi’’ 156,740 156,740JSC ‘‘Vachnaziani’’ 154,666 0 154,666Ltd ‘‘Forgotten Dance’’ 36,020 116,735 152,755

(continued)


Corresponding author

Armand Gilinsky can be contacted at: [email protected]

Table EV

Company name White wine Red wine Total

Ltd ‘‘KakheTi’’ 0 141,000 141,000Ltd ‘‘Tiki’’ 77,000 63,000 140,000Ltd ‘‘Lampari 97’’ 68,107 63,700 131,807Ltd’’Khvanchkara’’ 0 130,960 130,960Ltd ‘‘Batono’’ 74,683 52,642 127,325Ltd ‘‘Sangeo’’ 36,891 89,058 125,949Indiv. Entrep. ‘‘giorgi mirianaSvili’’ 0 125,000 125,000Ltd ‘‘Cellar’’ 89,300 31,500 120,800Ltd ‘‘Kolkhida vainsi’’ 6,194 106,993 113,187Ltd ‘‘Ushba distileri’’ 30,000 80,500 110,500Ltd ‘‘Tibaani’’ 106,373 359 106,732Ltd ‘‘Georgian Wine House in Racha’’ 10,030 94,860 104,890Ltd ‘‘vaCnaZianis Cellar’’ 0 99,750 99,750Ltd ‘‘Grigol Vashakidzee and brothers’’ 10,400 85,000 95,400Ltd Leo’’ 9,990 81,270 91,260Ltd ‘‘Kvareli sardafi’’ 81,000 81,000Ltd ‘‘Saamo’’ 74,877 3,590 78,467Ltd ‘‘e. Keburias Wine Factory’’ 18,239 58,631 76,870Indiv. Entrep. ‘‘besik jafariZe’’ 0 74,000 74,000Ltd’’Kindzmarauli jierve’’ 16,340 56,800 73,140Ltd ‘‘Tela’’ 71,000 0 71,000Ltd’’Second Sviri Wine Factory’’ 46,140 14,000 60,140Ltd ‘‘Sachino’’ 56,680 56,680Indiv. Entrep. ‘‘n. burkiaSvili’’ 8,445 48,095 56,540JSC ‘‘David Sarajishvili and Eniseli’’ 56,500 56,500Ltd ‘‘Feri’’ 0 54,000 54,000Ltd’’Golden sawmisi’’ 3,260 42,700 45,960Ltd’’Akhasheni1’’ 16,900 26,060 42,960Indiv. Entrep. giorgi TevzaZe 42,690 42,690Ltd ‘‘saqarTvelos saTavado Rvinoebi’’ 31,920 10,000 41,920Ltd ‘‘ji-ar-si international’’ 2,174 37,520 39,694Indiv. Entrep. ‘‘d.kapanaZe’’ 12,625 21,000 33,625Indiv. Entrep.’’meriZe Temuri 24,000 7,000 31,000komandituri sazogadoeba ‘‘kikabiZe dakompania’’ 31,000 0 31,000Ltd ‘‘Eniselis Wine Cellar’’ 5,820 23,500 29,320Indiv. Entrep. ‘‘Tamaz QevxiSvili’’ 13,000 15,000 28,000Ltd ‘‘Leliani’’ 27,800 27,800Indiv. Entrep. Giorgi Amirejibi 25,380 25,380Ltd ‘‘Vazi 1’’ 7,570 15,770 23,340Indiv. Entrep. ‘‘Eldorado’’ 20,000 0 20,000Indiv. Entrep. ‘‘Zauri JoxaZe’’ 5,000 14,000 19,000Ltd ‘‘Vineyard akurshi’’ 0 17,800 17,800JSC ‘‘Metexis Ceramic Factory’’ 15,660 2,000 17,660Ltd ‘‘VeZiruli’’ 17,032 17,032Ltd ‘‘Imereti Wine House’’ 14,800 0 14,800Ltd ‘‘Dike’’ 0 14,710 14,710Indiv. Entrep. ‘‘Givi NikolaSvili’’ 0 13,800 13,800Ltd ‘‘Zegaani Wine Cellar’’ 0 9,000 9,000Indiv. Entrep. Nugzar FeraZe 8,730 8,730Indiv. Entrep. ‘‘GoderZi GonaSvili’’ 5,110 2,767 7,877Ltd ‘‘Khiminji’’ 7,872 7,872Ltd ‘‘Wine Company Rcheuli’’ 3,758 0 3,758Indiv. Entrep. ‘‘g.gvelesiani’’ 2,500 500 3,000Ltd ‘‘ Bag’’ 0 750 750

Source: Vine and Wine Department SAMTREST


Teaching notes

Armand Gilinsky and Brent Trela

Case synopsis

The nationally important Georgian wine industry by 2008 was in a deep recession due largelyto the continuing 2006 Russian wine embargo, prior to which Russia had been the largestexport market for Georgian wines. Second World War-era Georgian wineries such as Shavteli(disguised), located in the historic Racha-Lechkumi wine-producing region, were at adisadvantage due to aging facilities, lack of a tourist infrastructure, and inadequate sourcesof capital to make needed changes. Along with other Georgian producers, Shavteli’s wineexport prices increased in the aftermath of the Russian embargo; its wine competed at arelatively high price point in the global markets for emerging economy wines. Shavteli and twonearby wineries, Bugeuli and Chrebalo, faced continuing operating deficits and highinventory levels, with the threat of losing much of their aging wine inventory to oxidation if theycould not quickly sell more wine or convert the wine to brandy. To avert becoming anotherdefunct regional and national producer, Shavteli needed a strategy. Industry observers weredivided about whether Shavteli and its sister Georgian wine producers should continueoperating independently, seek government support, or form a marketing association tocreate new export demand.

Suggested case use: courses and levels

Adopters using this case in a strategy course should have covered competitive strategy in aglobal context. Because of its subject matter, it is most suitable for undergraduates or MBAstudents towards the end of the course in a strategy implementation module, or as a‘‘culminating case’’ for a written final examination and/or student presentation assignment.The Shavteli case is ideally paired with coverage of strategic choices for competing ininternational markets and Michael E. Porter’s Diamond of National Advantage. The case issuitable for a review of the situation analysis, i.e. evaluating a company’s resources,capabilities, and competitiveness with respect to its external or task environment. The casealso can be used to review cost reduction tactics in pursuit of a low cost advantage vs countrybranding tactics in pursuit of a differentiation advantage. Adopters can stimulate discussionabout the impact of prior strategic decisions on performance and provoke a debate onwhether or not a strategic manager should stay committed to or deviate from a prior series ofdefensive routines in the context of a purely competitive, globalized industry. Students canput into practice techniques they have learned to evaluate diversification and globalizationstrategies, and use those tools to evaluate the pros and cons of vertical vs horizontalintegration or joint venture vs strategic alliance strategies in the context of Georgia’semerging economy and its prospective position in the global wine industry.

Learning objectives

Adopters can use this case to:

B Drill students in use of situation analysis tools such as strengths, weaknesses,opportunities, and threats (SWOT) analysis (see Discussion Question no. 1).

B Provide practice in evaluating an emerging economy using Porter’s ‘‘Diamond of NationalCompetitiveness’’ (see Discussion Question no. 2).

B Debate the pros and cons of international entry strategies and strategic alliances (seeDiscussion Question no. 3).

B Develop well-supported recommendations for strategies in an emerging economy (seeDiscussion Question no. 4).

Research methods for gathering case information

The case was entirely field-researched during the authors’ July 2008 visit to Georgia as part ofa study team to develop a national strategy for the Georgian wine industry. One author alsoparticipated as moderator of a focus group composed of key Georgian opinion leaders anddecision makers held in Tbilisi, Georgia, on July 15, 2008, just after the visit to theRacha-Lechkumi and Kakheti wine-producing regions. Supplemental secondary researchwas conducted as necessary to provide background information. Samtrest, the wineoversight agency of the Georgian Ministry of Agriculture provided national productionstatistics to the authors. All names of people and the subject company were disguised topreclude the need to obtain permissions from individuals.


Basic pedagogy and discussion guidance

The case has been classroom tested with undergraduate students in a capstone strategyclass, and is suitable for both written assignments and oral group presentations. See a list of‘‘Suggested further readings’’ at the end of this note. Also, adopters who wish students tolearn more about the global wine industry context as of 2008 should assign ‘‘A Note on theUSA Wine Industry 2008’’ (in Faraoni and Santini’s 2010 text, Managing the Wine Business) asa companion reading to this case. Instructor’s Manual Exhibits 7-11 are available to adoptersat the end of this document for ease of reproduction as viewgraphs and/or dissemination tostudents.

Students should already have covered Porter’s ‘‘5-Force Analysis’’ and used thisframework to determine that the wine industry is unattractive: it is mature and the primaryproduct is a luxury commodity that is sold in a purely competitive market, that is to say, amarket in which there is no true low cost producer, so rivals must compete on differentiationand scope.

Achieving and sustaining a competitive advantage in the wine industry is also confounded bythe following factors:

B Chronic overcapacity in the wine industry.

B Ease of buyers (distributors and consumers) switching from one producer to anotherproducer, as brand loyalty to the product is low and sellers are fragmented.

B Prohibitive transportation costs for both suppliers and producers – exacerbated if thepoints of sale are distant from the point of production.

B Large capital requirements for property, plant, and equipment.

B Moderately high labor intensity.

B Moderately high proportion of fixed to variable costs, and fixed costs areresource-specific.

B Threat of government action with respect to embargos or at another extreme, to seizeprivate assets that could be nationalized.

Owing to the above factors, to achieve a competitive advantage, a wine producer must

compete via achieving economies of both scale (vertically) and scope (horizontally).

Vertical scale is the extent to which a firm’s internal activities encompass one, some, many, orall of the activities that make up an industry’s entire value chain system, ranging from rawmaterial production to final sales and service activities:

B A vertically integrated firm is one that performs value chain activities along several portionsor stages of an industry’s overall value chain, which begins with the production of rawmaterials or initial inputs and culminates in final sales and service to the end consumer.

B Backward integration involves performing industry value chain activities previouslyperformed by suppliers or other enterprises engaged in earlier stages of the industry valuechain, such as owning the vineyards or entering into long-term contracts with wine grapegrowers.

B Forward integration involves performing industry value chain activities closer to theend-user, such as wine tasting rooms, web sites, wine clubs, and direct sales toconsumers. Vertical integration raises a producer’s capital investment in its industry,increasing operating risk.

B Vertically integrated companies are, however, often slower to embrace technologicaladvances or more efficient production methods when they are saddled with oldertechnology or facilities, as is clearly evident in this case.

Horizontal scope refers to the range of product and service segments that a firm serves

within its focal market. Increasing a company’s horizontal scope can strengthen its business

and increase its profitability in five ways:

1. By improving the efficiency of its operations.

2. By heightening its product differentiation.

3. By reducing market rivalry, e.g. via merger and acquisition, or exit of weaker firms.


4. By increasing the company’s bargaining power over suppliers and buyers.

5. By enhancing its flexibility and dynamic capabilities.

Horizontal integration also tends to raise a producer’s long-term capital investment in its

industry, thereby increasing the company’s financial risk.

In The Competitive Advantage of Nations (1990), Michael E. Porter asks the question, why dosome nations succeed and others fail in international competition? Porter notes that crafting astrategy to compete in one or more countries of the world is inherently more complexbecause of:

B factors that affect industry competitiveness that vary from country-to-country;

B the potential for location-based advantages in certain countries;

B different government policies and economic conditions that make the business climatemore favorable in some countries than in others;

B the risks of adverse shifts in currency exchange rates; and

B cross-country differences in cultural, demographic, and market conditions.

Certain countries are known for their strengths in particular industries. For example, Chile hascompetitive strengths in industries such as copper, fruit, fish products, paper and pulp,chemicals, and wine. Japan is known for competitive strength in consumer electronics,automobiles, semiconductors, steel products, and specialty steel. Where industries are morelikely to develop competitive strength depends on a set of factors that describe the nature ofeach country’s business environment and vary across countries. Because strong industriesare made up of strong firms, the strategies of firms that expand internationally are usuallygrounded in one or more of these factors. The four major factors are summarized in aframework known as the Diamond of National Advantage (Figure 1).

Demand conditions. The demand conditions in an industry’s home market include the relativesize of the market and the nature of domestic buyers’ needs and wants. Industry sectors thatare larger and more important in their home market tend to attract more resources and growfaster than others. Demanding domestic buyers for an industry’s products spur greaterinnovativeness and improvements in quality. Such conditions foster the development ofstronger industries, with firms that are capable of translating a home-market advantage into acompetitive advantage in the international arena. Porter writes, ‘‘A good example is the wineindustry, where high per capita consumption in wine-producing countries such as Italy andFrance is due in large part to the presence of local production that is associated with widelocal availability of wine and greater product awareness by local consumers’’ (p. 137).

Factor conditions. Factor conditions describe the availability, quality, and cost of rawmaterials and other inputs (called factors) that firms in an industry require to produce theirproducts and services. The relevant factors vary from industry-to-industry but can includedifferent types of labor, technical or managerial knowledge, land, financial capital, and

Figure 1 Porter’s diamond of national advantage

Factorconditions

Demandconditions

ChanceGovernment

Firm strategy,structure and

rivalry

Related andsupportingindustries


natural resources. Elements of a country’s infrastructure may be included as well, such as itstransportation, communication, and banking system. For instance, in India there are efficient,well-developed national channels for distributing trucks, scooters, farm equipment,groceries, personal care items, and other packaged products to the country’s three millionretailers, whereas in China distribution is primarily local and there is a limited national networkfor distributing most products. Competitively strong industries and firms develop whererelevant factor conditions are favorable. Porter writes, ‘‘The University of California at Davis, inthe heart of California’s wine country, is another good example (of factor creation). It hasbecome perhaps the world’s leading center of wine-making research in close and activeinterchange with the California wine industry. This combination has engendered many of theinnovations in wine making in recent years’’ (p. 134).

Related and supporting industries. Robust industries often develop as part of a cluster ofrelated industries, including suppliers of components and capital equipment, end-users, andthe makers of complementary products, including those that are technologically related. Thesports car makers Ferrari and Maserati, for example, are located in an area of Italy known asthe ‘‘engine technological district’’ that includes other firms involved in racing, such as DucatiMotorcycles, along with hundreds of small suppliers. The advantage to firms that develop aspart of a related industry cluster comes from the close collaboration with key suppliers andthe greater knowledge sharing throughout the cluster, resulting in greater efficiency andinnovativeness.

According to Thompson et al. (2012), different country environments foster the developmentof different styles of management, organization, and strategy. For example, strategicalliances are a more common strategy for firms from Asian or Latin American countries, whichemphasize trust and cooperation in their organizations, than for firms from North America,where individualism is more influential. In addition, countries vary in terms of thecompetitiveness of their industries. Fierce competitive conditions in home markets tend tohone domestic firms’ competitive capabilities and ready them for competing internationally.For an industry in a particular country to become competitively strong, all four factors must befavorable for that industry. When they are, the industry is likely to contain firms that arecapable of competing successfully in the international arena.

The diamond framework can be used to reveal the answers to several questions that are ofparticular salience for emerging economies that are intending to or are already competing onan international basis. First, it can help predict where foreign entrants into an industry aremost likely to come from. This can help managers prepare to cope with new foreigncompetitors, since the framework also reveals something about the basis of the new rivals’strengths. Second, it can reveal the countries in which foreign rivals are likely to be weakestand thus help managers decide which foreign markets to enter first. And third, because itfocuses on the attributes of a country’s business environment that allow firms to flourish, itreveals something about the advantages of conducting particular business activities in thatcountry. The Porter Diamond of National Advantage framework is, therefore, a useful aid todeciding where to locate different value chain activities most beneficially.

Students should closely study Porter’s Diamond of National Advantage and determine that,with respect to Georgia, there are – with the possible sole exception of factor conditions suchas labor input costs – due to the high poverty indices in Racha and Kakheti – relatively fewhome-market advantages.

Factor conditions such as labor, land, natural resources give Georgian wineries certainadvantages in their home market, but these advantages do not necessarily transfer well tomore distant markets outside of the former Soviet states and Eastern Europe (and possiblyGermany), as wine is costly to transport. Some students may also question whether or notGeorgia possesses other factor condition advantages, such as tourism infrastructure,technical or managerial knowledge, educational institutions for the study of viticulture andenology as well as wine business management and marketing, or financial capital, that is,relative to the ‘‘New World wine’’ producers in Australia, New Zealand, South Africa, SouthAmerica, USA; or relative to other highly traditional wine producers from the ‘‘Old World wine’’industrialized nations in Europe.

Demand conditions in Georgia, such as market size and domestic consumption growth, aresurely far below those in other emerging nations such as China and India. It should be notedthat the improving Georgian economy by 2008 would not necessarily be immune to theslackening demand for consumer luxury goods in the aftermath of the global financial crisis inlater that year and extending into 2010.


Related and supporting industries, e.g. wine tourism and related infrastructure to increasethe proximity of suppliers and users, are surely more highly developed in the industrializednations of the EU and USA and Australia than they are in Georgia and neighboring formerSoviet satellite states.

As to firm strategy, structure, and rivalry, no one wine producer’s dominance in Georgiacombined with the disappearance of numerous producers in the aftermath of the 2006Russian embargo and with Georgia’s centralized, hegemonic leadership from Samtrest, mayor may not bode well for those remaining smaller producers. The need to develop strategicalliances and/or joint ventures is acute, as acquisition opportunities are subject to availablefinancing and government regulation, neither of which are favorable. However, andsignificantly, no Georgian wineries have formed strategic marketing partnerships or otheralliances to date, other than the Young Winemakers Association.

Discussion questions and sample student answers

Superior student responses are denoted below by an asterisk (*). Approximate times fordiscussion in an 80-minute class session are provided in brackets [] following each question.

Question 1. Describe and evaluate Shavteli’s situation in July 2008 (15-20 minutes).Shavteli’s current strategy has been to wait out the Russian embargo. Clearly, this is notworking well for this company, or for any of the Georgian wineries. The economic downturn inthe early independence years damaged the wine industry. Post-communist Georgia hassuffered from a lack of capitalist know-how. Businesses need to implement proactivestrategies to grow and bring economic stimulus to the Georgian wine sector. They needstructure and formalized business plans written by people with the knowledge and skills tobecome a globally competitive industry. Although the Georgian wine industry facesnumerous threats and difficulties, its opportunities remain vast.

Georgians are said to be the pioneers of wine making. Archaeologists claim wine makingbegan in Georgia nearly 6,000 years ago. Over 500 different grapes are grown throughout thecountry; prospective flavors and taste varieties are endless. Moreover, wine is highlyimportant to the Georgian culture and economy, and a worthy story to share. Georgia’swinemaking has several unique points/compelling stories:

1. Unique story:

B History.

B Birthplace of V. vinifera – the classic European grape species.

2. Unique flavors:

B Unique grape varieties like Saperavi are seldom grown elsewhere.

B Unique traditional wine-making methods – qvevri fermentation vats.

3. Tradition/experience:

B Qvevri winemaking is unique and could be a unique selling point, at least temporarily.

*However, a lack of business know-how is allowing this industry to crumble. Wine producers

in concert need to develop a competitive strategy and differentiate themselves in the global

markets for wine, especially in the former Soviet states, Eastern Europe, and the USA.

A situation ‘‘SWOT’’ analysis is helpful in order to assess Shavteli’s competitive position. Anorganization’s strengths and weaknesses are under management’s control and include areasthat should be consistently and continuously measured and improved. Shavteli’s greateststrengths include its differentiated wine and its track record as a historical, long-standingbusiness. Shavteli has a good story to tell: it began as a private winemaking facility for Sovietleader Josef Stalin and has been in operation for over 65 years. Shavteli’s wine is highlydesired and has even been imitated in Germany where Georgian wine is not widely available.Unfortunately, Shavteli’s weaknesses include a facility and equipment that are run-down andoutdated and they are lacking available capital to replace and restore the over 40-years-oldfermentation vats.

Opportunities and threats, on the other hand, are external factors and are outsidemanagement’s control. Shavteli has the opportunity to achieve high-growth in exports as thatmarket is largely untapped by Georgian wineries. With only a handful of major competitors leftin Georgia, Shavteli needs to lead proactively and begin the efforts of making Georgian wineavailable in other major countries. The Russian embargo was a huge threat to Georgian


wineries and this ban had a high impact on Shavteli’s sales. Unfortunately, the majority ofShavteli’s production had been exported to Russia and the winery is now suffering theconsequences of not having a diversified consumer base. That is, Shavteli was satisfied withthe status quo and struggled to grow its business beyond the Russian exports. Now, Shavtelineeds to analyze new consumer markets and focus on becoming the leading Georgianwinery.

*These SWOT have been summarized in the TOWS Matrix, shown in Exhibit 7, and have beenrated and weighted using a strategic factors analysis summary (SFAS) matrix, shown inExhibit 8.

In order to overcome the obstacles presented, Shavteli should concentrate on exportingdifferentiated wines to major countries, primarily Germany and the USA. This strategy willhelp Shavteli become a niche player. The USD $9.99-19.99 price segment is the heart of theexport wine market. This is a logical price point for Shavteli to offer its wines, as Shavteli’saverage export was $2.70 per bottle, creating a gross margin of 73-86 percent. Downsides tothis marketing strategy are that exports to countries in the EU and the USA incur high dutiesand taxes; also a majority of supermarkets charge a ‘‘slotting fee’’ to sell wine. However, ifShavteli tailors its brands to focus on consumer segments that ‘‘view wine purchase as anadventure’’ and think ‘‘wine is a global experience,’’ Shavteli’s sales and margins couldremain sufficiently healthy to offset incremental export costs.

Question 2. Evaluate Georgia’s wine industry using Porter’s ‘‘Diamond of National

Advantage’’ Does Georgia possess any natural advantages vs other wine-producing

nations? On which factors should the Georgian wine industry focus its efforts to attain future

advantages? (15-20 minutes). Michael E. Porter has summarized the major factors thatdetermine why companies succeed or fail international competition with his framework theDiamond of National Advantage. The theory is that companies who succeed internationallyare usually grounded in one or more of the following: demand conditions, factor conditions, orrelated and supporting industries.

An evaluation of demand conditions shows that Shavteli is really lacking in this area becauseit does not have a strategy to sell locally or even nationally, much less to export markets. Sincethe Russian embargo, Shavteli’s sales included exporting primarily to Ukraine and Germany.Some students may argue that these countries are viable options for profits, others thatShavteli should redouble its efforts to export wines to the USA. Referring to Exhibit 9, we cansee that Georgian wine exports to the USA have decreased drastically from 2005 to 2007.

Moreover, Shavteli does not have a tasting room nor facilities to offer direct sales to visitors,nor an apparent marketing program in place. Without direct local resources, the publiccannot help Georgian wineries achieve the domestic support they need. Racha is a beautifulplace and an excellent wine-growing region and Shavteli could try and entice the localpopulation to support the wineries, but there is high poverty and demand is consequentlygoing to be quite low. Nevertheless, Shavteli should clean up its facility, create some sort of atleast rudimentary tasting room, and have visible billboards and signs to attract customers.

In terms of factor conditions, Shavteli has the wine-making knowledge to create a qualityproduct but its facility is worn-down and outdated. This is probably costing more money tomaintain equipment and hand bottle each order. Because of the poor state of the Georgianeconomy in the primary wine-growing regions of Kakehti and Racha, the wine industry issuffering while waiting for infrastructure improvements and changes to be made. *A hugefactor in the Georgian wine industry is failure to keep up with global trends in vineyardpractices. Production facilities are also a concern for Shavteli, as it would be very costly toreplace equipment and renovate facilities. To make things even more difficult, roads, streetsigns, and hotel accommodations are inadequate for travelling distributors and tourists, asRacha is located six hours away from the capitol of Tbilisi, where more modern airport andhotel accommodations exist.

In regards to related and supporting industries, Shavteli is in a good position here because itis located in the Racha wine-growing region and its wine is highly desired by consumersfamiliar with semi-sweet Georgian wines. Since this factor is usually a benefit to the firm asrelated industries can share knowledge and achieve innovation, it is essential to form astrategic alliance with those wineries that are left and strenghten the Georgia wine industry forevery winery. Georgia is one of the fastest growing emerging economies in Eastern Europewith a GDP growth rate of 12 percent in 2007. Shavteli has the ability to grow substantially if itsresources are allocated in the right places.


The major country competitiveness factors for the Georgian wine industry are summarized inExhibit 10.

Question 3. Should the Georgian wine industry pursue an international strategy,

multidomestic strategy, global strategy, or transnational strategy? Explain (10-15 minutes).Students should be directed to carefully review the definitions as well as the pros and cons ofthese strategies for competing in global markets:

1. An international/global strategy is a strategy for competing in two or more countriessimultaneously.

2. A multidomestic strategy is one in which a company varies its product offering andcompetitive approach from country-to-country in an effort to be responsive to differingbuyer preferences and market conditions:

B This is a think-local, act-local type of international strategy, facilitated by decisionmaking decentralized to the local level.

3. A transnational strategy (sometimes called ‘‘glocalization’’) incorporates elements of botha globalized and a localized approach to strategy making:

B This type of middle-ground strategy is called for when there are relatively high needs forlocal responsiveness as well as appreciable benefits to be realized fromstandardization.

B A transnational strategy is a think-global, act-local approach that incorporateselements of both multidomestic and global strategies.

Any business contemplating globalization must make decisions regarding:

B the need to balance the cost with the multi-brand and multi-positioning (differentiation)sides of its business model;

B the need to be responsive to local market vs global market characteristics;

B which overseas markets to enter;

B when to enter those markets; and

B what scale to enter those markets.

Superior students should weigh the advantages and disadvantages of various entrystrategies – international/global, multi-domestic, and transnational – for competing globally,and apply those to Shavteli and other Georgian wine producers. According to Bartlett andGhoshal (1989), international and global strategies tend to be least appropriate in marketswhere local responsiveness to consumer tastes is important (e.g. in consumer food andbeverage products industries, with the possible exception of sodas, beer, and spirits).However, in the wine industry, competitive conditions are so intense that to survive,companies must essentially do all they can to respond to pressures driving cost focus andlocal responsiveness strategies.

Shavteli has a current inventory of 60,000 liters and should market to a region where they havea track record for selling their product. Therefore, an important decision is to identify thatmarket. According to Exhibit 1 (in the case study), their top four export countries are inEastern Europe, with Ukraine being number one. Mr Ambasador, the winemaker, alsotouched on the idea of expanding into the German market. However, looking at the numbersbetween 2005 and 2007, the volume of bottles exported to Germany decreased by 25,023bottles. Therefore, it would be advantageous to forgo Germany (and new markets) for rightnow, and market to their neighboring niche Eastern European region through an internationalstrategy.

*Though an international strategy is the least lucrative compared to other global strategies, itis the easiest and least complex, not to mention least costly. This method focuses primarilythrough exporting and licensing, so Shavteli would not have to learn a new marketingtechnique until they have raised or internally generated additional capital. This is especiallytrue since demand for wine in Georgia is not particularly high. With a population of only 4.7million, residents of this country would have to drink an additional 15 bottles per year to takeon the extra capacity Shavteli and other wineries would produce in the future, according tothe case. This national supply/demand imbalance places all Georgian wineries, Shavteliincluded, at a disadvantage.


In reality, Shavteli, along with other winemakers in Georgia, are in a tough industry. Wineproduction is capital-intensive, Georgia has a world market share of only 0.3 percent,government support for wine production is 0.5 percent of the total Georgian budget, and theyhave lost their major export market customer.

*In order to successfully market to the diaspora of former Soviet citizens who drink wines, say,living in Eastern Europe, Shavteli needs to provide a lower price option. Through pricepenetration, Shavteli can dominate the industry segment, while also gaining a larger marketshare. More specifically, they would be utilizing a cost focus competitive strategy. Using thisapproach, wines from the Racha region will more likely get into the hands of their niche marketcustomers because of the lower price point. Selling the product for a lower price would alsouse the current technology and expertise already used when they previously sold to theRussian market. In the short run, however, Shavteli may be compromising an ability todifferentiate its wines. The vision from the very beginning for this company was to sell aproduct that could be recognized as uniquely Georgian. As of right now, the world has verylittle knowledge that Georgia grows grapes. Even its residents remain largely unaware of theirproduction. Though this cost focus could stall the wineries’ ability to market a differentiatedwine, the strategy’s potential could be instrumental in providing the company with theshort-term cash flows necessary to expand production.

Question 4. What strategy recommendations would you make to Mr Ambasador? Should

Shavteli Winery consider divesting assets or new strategies? Are there other potential

strategic options than those at the end of the case that he needs to consider? Justify your

recommendations by outlining the pros and cons of each (10-15 minutes). Students offer arange of possible approaches in answer to this question. These are edited and reproducedbelow, in order of higher impact in terms of aiding Georgia’s progress as an emergingeconomy.

Inventory disposal. Individually and collectively, the Racha producers have a huge amount ofcurrent inventory to sell. They are at a crossroads with their older inventory. It either needs tobe sold quickly, or distilled into brandy. The case mentioned converting the wine into brandy(wine vodka). Table I shows that a potential profit is to be made by selling brandy. By makingbrandy they will be able to draw in a broader range of clientele and ensure that no bottle ofwine goes to waste. This will allow them to separate themselves from the other two wineries inRacha while also helping the alliance by drawing in more people and increasing sales at thetasting room.

Conversion of bulk wine inventory into brandy could act as a horizontal growth strategy,allowing Shavteli to pursue the spirits market, however, there are many costs involved withproduction and licensing in order to sell spirits. *Another more feasible way to move this winewould be to dramatically cut the price and sell the wine on the bulk market. This would at leasttemporarily increase cash flow while freeing up space for newer vintages. This money couldthen be reallocated internally to improve other inefficiencies the winery is facing.

Cost focus niche. For the next couple of years, it would be appropriate to market to a smallerniche geographic region at a lower price. This should provide them with sufficient cash flow tostabilize their business and then allow for growth. In the future, thanks to an alliance with theircompetitors, they can expand their target market with a more differentiated product line.

Sustainability niche. One of the fastest growing strategies in today’s world is to become anenvironmentally friendly business. With 40-years-old fermentation vats, toxic paint odors, andunsafe wires hanging from electrical boxes, Shavteli (not unlike its nearby rivals) has a strongneed to update production and modernize factories. What better time to ‘‘go green’’ thannow? While switching to solar energy can be expensive in the short-term, it woulddramatically reduce utility costs in the future. The implementation of environmentally friendlypractices would shine a positive light on Georgian wineries’ commitment to reducing theircarbon footprint and producing organic wines for sale to health conscious consumers indeveloped nations.

*Strategic alliances and industry partnerships. Short of the Russian embargo being lifted,swift action needs to be taken to put Shavteli Winery and the Georgian Racha-region back onthe map. To accomplish this, the winery should develop a moderately low price point to gaininitial market share, form an alliance with their closest geographical competitors Bugueli andChrebalo, and shift to expand its export market beyond Eastern Europe once the alliance hasgained expertise and efficiency. *By capitalizing on the strengths of the three entities,improvements can be achieved at the individual wineries as well as raising the status of theirregion. Forming alliances and cooperatives is a must.


Another necessity is to engage in a unified Georgian producers’ marketing alliance andsubsequent campaign to advertise Georgian wine’s diversity and individuality. Each winerywould reap the benefits of a significant marketing campaign at a fraction of the cost. Includedin this marketing plan could be ‘‘wine weekend’’ bundles with promotional discounts on wine,tours of the wineries, complementary tastings and overnight accommodation to encouragewine tourism. Working together can cut costs in other ways. Bugeuli has a modern membranefiltered bottling line that is available for use by other wineries and by sharing the productioncosts it would in return reduce the COGS per ton. Another benefit would be to export togetherto avoid sending half-filled containers and reduce shipping expenses.

Next, Shavteli and the other wineries need to lobby the government to improve infrastructureand increase spending by 5 percent. By just increasing government spending to 10 percentwould drastically improve the Racha wine region. With paved roadways they can encouragewine tourism thus increasing direct sales to customers while also creating a ‘‘butterfly effect’’of stimulating the Georgian economy. It will create more business for dining andaccommodation services as well as pumping money back into the economy andincreasing tax revenues.

Other students may argue to dispense with attempting to seek any government aid toimprove the wine tourism of the Racha region. Some may suggest that, Shavteli and otherRacha wineries can encourage wine tourism in other ways. One thought is to create seasonalfairs and wine-related events that heavily promote the Georgian brand and attract tourism.Some may suggest that Georgian wine producers take it upon themselves to promotetastings in wine shops, or try and stimulate on-premises sales via events at restaurants andhotels that demonstrate how the wines pair with Georgian and other regional cuisines.

Finally, until the concerted producers’ alliance earns more profit through increased sales andexports, they need some immediate financing. There are several options:

B producers could try to entice investors from the other wine-producing nations who wish togain access to the unique and indigenous grape varieties of Georgia; or

B form business agreements with them to try and sell their inventoried wine in bulk.

Under a co-operative agreement, they can achieve sufficient critical production mass and

collateral need to apply for bank loans as a collective entity among the three Racha region

wineries thus reducing the individual producer’s risk and increasing the probability of

profitable returns.

See Exhibit 11 for a figure showing the potential synergies from one proposed regionalproducers’ alliance.

To wrap up the discussion, instructors might say: How do we differentiate our country in theglobal economy? Do we support an industry’s global expansion, and if so, where to? Who isthe competition and what can we do to gain the competitive advantage over them? Whateconomic trends and which government regulations will have an effect on us? Does ourmission statement and values represent what our business is about and how do we align ourstrategies accordingly? All businesses when creating a strategic plan for some reason oranother must ask themselves these questions and think about short- and long-term effectstheir strategy will have on their business and their country.

Epilogue

Other than the recent dissolution of Samtrest by the Georgian Ministry of Agriculture, and thebeginning of an effort by the remaining Georgia wine producers to create a wine marketingagency on behalf of all producers, there are no major developments to report at the time ofthis writing. The Russian embargo still has not been lifted.

Table I Potential profit from converting bulk wine inventory into brandy

Wine Brandy Difference

Average bottle 750 ml 750mla

Sold for in the USA $10 per bottle $25 per bottlea $15Shavteli has 60,000 liters in inventoryb 80,000 bottles x $10 each¼$800,000 80,000 bottles x $25 each ¼ $2,000,000 $1,200,000

Notes: aStrategic guess; b60,000 l¼60,000,000 ml ) 60,000,000 ml/750 ml per bottle ¼ 80,000 bottles


Suggested further readings

Bartlett, C.A. and Ghoshal, S. (1989), Managing Across Borders: The Transnational Solution,Harvard Business School Press, Boston, MA.

Gilinsky, A. (2010), ‘‘A note on the USA Wine Industry 2008’’, in Faraoni, M. and Santini, C.(Eds), Managing the Wine Business: Research Issues and Cases, McGraw-Hill, Milan,pp. 1-23 (Chapter 1).

Porter, M.E. (1990), The Competitive Advantage of Nations, The Free Press, New York, NY.

Thompson, A.A., Peteraf, M.A., Gamble, J.E. and Strickland, A.J. (2012), Crafting andExecuting Strategy, 18th ed., McGraw-Hill-Irwin, New York, NY, pp. 207-9.

Exhibit 7. TOWS matrix for Shavteli winery

Table EVI

Internal factors (internal factoranalysis summary)

Strengths (S)Unique, rich heritage flavor ofwineUnique storyExperience

Weaknesses (W)Poor production facilityNo wine tastingGlobal positioningNo brand recognition

External factors (external factoranalysis summary)Opportunities (O)

Form alliances immediatelyRecent growth in China andformer Soviet countriesExpected increase of dry winesales

WWTG

SO strategiesForm a co-operative withremaining wineries to increaseindustry presence. Join WWTGto increase market shareglobally

WO strategiesPromote ‘‘Georgian brand’’ andencourage wine tourism.Expand exports to SouthAmerica, Australia, China andthe Ukraine

Threats (T)Strong US competitionSamtrest regulationRussian embargo

ST strategiesDevelop strong capitalistic andwestern business planningstrategies to be able to competewith the USA. Promoteauthentic, Georgian organicwine industry together with allthe remaining open Georgianwineries

WT strategiesFind new markets and countriesto export to in order to make upfor the loss of Russian business(98 percent of exports)


Exhibit 8. SFAS matrix for Shavteli winery

Exhibit 9. Bar graph of Georgian wine exports, 2005-2007

Table EVII

Strategic factors Weight RatingWeighted

score Short Intermediate Long Comments

Unique, highly desired product (S) 0.25 5 1.25 X Need to focus on this strength andhighlight diversification

Located in excellent wine growingregion (S)

0.15 4 0.60 X Good quality grapes and no majorissues with harvests

Poor facilities and equipment (W) 0.10 2 0.20 X Run-down factory, not easy to get toLack of motivation and goals (W) 0.10 2 0.20 X Owner is thinking about throwing in

the towel. No long-term goals orstrategies have been established

Partnership/alliances with otherwineries (O)

0.15 3 0.45 X Pool together resources to offer afacility or tasting room for direct salesto customers

Worldwide sales (O) 0.15 1 0.15 X Obtain Samtrest certification andfocus on exports. USA is a majorgrowth opportunity

Russian embargo (T) 0.05 2 0.10 X Sales have suffered greatly. No wordif/when embargo will be lifted

Lack of government and unionassistance (T)

0.05 3 0.15 X Wineries need to help themselves

Total 1.00 3.10

Figure E2


Exhibit 10. Porter’s diamond of national advantage for the Georgia wine industry

Exhibit 11. Potential synergies from a regional strategic alliance in Racha

Figure E3

Figure E4

Shavteli

Production EngineerexpertiseLarge inventory

Company story

•

••

Bugeuli

MicroelectronicsexpertiseState of the artequipmentFully integratedsystem

•

•

•

Chrebalo

Viticulture expertise

14 employees

••


Abstract

Title – Shavteli Winery: where to go from here?

Subject area – International marketing, national competitiveness, strategic decision-making, wine.

Study level/applicability – Undergraduate and MBA.

Case overview – The nationally important Georgian wine industry by 2008 was in a deep recession duelargely to the continuing 2006 Russian wine embargo, prior to which Russia had been the largest exportmarket for Georgian wines. Second World War-era Georgian wineries such as Shavteli (disguised), in thehistoric Racha-Lechkumi wine-producing region, were disadvantaged due to aging facilities, lack oftourist infrastructure, and inadequate capital to make needed changes to compete in the global marketsfor emerging economy wines. All nearby wineries faced continuing operating deficits, high inventorylevels, and could lose much of their aging wine inventory to oxidation if they could not quickly sell morewine or convert the wine to brandy. To avert becoming another defunct producer, Shavteli needed astrategy. Industry observers were divided about whether Shavteli and its sister Georgian wineries shouldcontinue operating independently, seek government support, or form a marketing association to createnew export demand. Students need to prepare a strategic plan for Shavteli and the Georgian wineindustry.

Expected learning outcomes – Students should develop well-supported recommendations forcompetitive strategies in an emerging economy. Students should use strengths, weaknesses,opportunities, and threats and country competitiveness analyses to ascertain vision and mission,segmentation, targeting, positioning, and alliance strategies for international markets.

Supplementary materials – Teaching notes.


Shavteli Winery: where to go from here?

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